Energy tariff options for vulnerable consumers
A research report for Citizens Advice
Project duration: November 2014 to May 2015
Energy tariffs could be amended to reduce the extent that vulnerable customers, who are inactive in the energy market, are penalised by higher energy tariffs. This was the key finding of our study of tariff options for such consumers, conducted on behalf of Citizens Advice.
“Research shows that there are several straightforward options that could be introduced to significantly reduce the fuel bills of millions of vulnerable consumers who are currently disadvantaged by the energy market, paying over the odds for their fuel" – Dr Toby Bridgeman, the researcher at CSE who led the study.
Prior to the study, Citizens Advice identified a number of possible options that could address the problems with the energy market that result in some consumers paying higher energy tariffs. Our work provides researchers, policy makers and energy market stakeholders with a deeper understanding of how these proposed reforms might compare: which income groups would be the winners and losers, the policy costs, other net benefits and impacts, and how politically and practically feasible they each are.
The research used the outputs from a tried and tested model of household energy consumption, thereby ensuring robust results and providing a mark of assurance to stakeholders. CSE was ideally placed to carry out the work; our Distributional Impacts Model (DIMPSA), used in this study, is now used routinely by DECC to establish the impact of its policies on household energy bills. We have a national reputation for fuel poverty research work, regularly undertaking work for DECC, Ofgem, eaga Charitable Trust and Joseph Rowntree Foundation. Our fuel poverty research was quoted in the Hills Fuel Poverty Review and we have recently modelled the impact of the UK’s carbon budgets on fuel poverty for the Committee on Climate Change.
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There were two main phases of this research study. Firstly, ten tariff options were reviewed, drawing on both existing evidence and expert stakeholder opinion. The second phase consisted of modelling and analysis to explore the potential distributional impacts of a selection of options, chosen based on the findings from phase one. These included:
Introduction of a backstop tariff: a low-priced tariff, to which eligible customers would be transferred automatically.
Provision of a block of consumption exempt from environmental and social policy levies: the costs of environmental and social policies such as the Energy Company Obligation (ECO), the Feed-in Tariff (FIT) and the Warm Home Discount (WHD) make up around 6 per cent of domestic gas prices and 11 per cent of electricity prices. Under this option, these levies are removed from a block of consumption to provide households with some energy free of these charges. The full costs are instead recovered from the remaining (higher) consumption bands.
Exemption from environmental and social policy levies for some consumers: similar to the above option, but the levy is only removed from the bills of vulnerable consumers, and costs would be recovered through increases in the bills of other customers.
Revision of the Warm Home Discount/fuel price support: this could take several forms, for example, extending eligibility to more households, increasing the payment or funding the payment through taxation instead of through energy bills. The first of these (extending the group) was modelled here.
Determining the target group
To further explore the impact of these tariff options on household energy bills, a proxy for the most vulnerable, disengaged consumers had to be established. The chosen group were those meeting the eligibility criteria for the Cold Weather Payments (CWP), as this provides a good approximation of potentially vulnerable and disengaged customers, who are at risk of being penalised by the energy market with higher fuel prices. Analysis showed that 96% of the CWP target group displays one or more of the following characteristics: disabled, elderly, in the poorest 20% of households, never switched energy supplier.
Modelling was undertaken using up-to-date variations in unit fuel prices and CSE’s comprehensive dataset of UK household energy consumption (derived from the Distributional Impact Model for Policy Scenario Analysis – DIMPSA); the latter is based on a socio-demographically representative sample of UK households surveyed in the Office of National Statistics Living Costs and Food Survey. In the model dataset, the CWP eligibility criteria were used to identify the target group as described above. Baseline tariffs were applied to different households, based on a selection of socio-economic characteristics of households and a switching behaviour prediction model.
Table E1 shows the tariff options that were modelled, along with the target group and how revenue neutrality – maintaining energy bill revenues to pre-modelling levels – was ensured in each scenario.
|Tariff Option||Description||Target Group||Ensuring revenue neutrality|
|The lowest tariff available for their fuel type and payment method in their region ||CWP-eligible customers only||Tariffs for all non-eligible customers increased|
|The lowest tariff available for their fuel type in their region, irrespective of payment method||CWP-eligible customers only||Tariffs for all non-eligible customers increased|
|As per Option 1, but only non-switchers are moved to the lowest tariff available for their fuel type and payment method in their region||CWP-eligible and non-switcher customers only||Tariffs for all non-eligible customers increased|
|As per Option 1 (the lowest tariff available for their fuel type and payment method in their region or devolved nation) but with all tariffs adjusted to ensure revenue neutrality (including the backstop tariff)||CWP-eligible customers only||Tariffs for all customers increased|
|Energy policy levies removed from an initial block of consumption||All customers||Unit rate increases for higher block of consumption for all customers|
|Energy policy levies removed from an initial block of consumption||CWP-eligible customers only||Unit rate increases for higher block of consumption for all customers|
|Initial block of energy consumption free||All customers||Unit rate increases for higher block of consumption for all customers|
|Initial block of energy consumption free||CWP-eligible customers only||Unit rate increases for higher block of consumption for all customers|
Extension to WHD
|WHD rebate extended to CWP-eligible customers and all energy suppliers ||CWP-eligible customers only||Additional cost on bills of all customers to pay increase in WHD allocatio|
Table E1: Summary of tariff options modelled
 In theory, the backstop tariff would involve transfer of customers to the lowest tariff available from the same supplier; however, information about energy supplier was not available in the data. Instead the regional minimum fuel price was used for the purpose of the modelling.
 As noted above, the data used in the modelling does not contain information on energy suppliers. By default, modelling this tariff therefore effectively assumes the WHD is extended to all suppliers, as the scenario applies the rebate to anyone meeting the CWP eligibility criteria (which includes the current WHD criterion of all those on pension credit).
The impact of each tariff option on household energy bills was analysed for the target group and for the population as a whole. Maintaining revenue neutrality (the total sum paid by all consumers) means that for particular tariff options, the tariffs and energy bills increase for some consumers, to offset reductions in the tariffs of the target group.
Figure E1: Average impact of tariff options on all eligible and non-eligible households
‘Winners’ and ‘losers’ under these scenarios
For all options, across the population as a whole, more households experience bill increases than bill reductions (the number of ‘losers’ exceeds the number of ‘winners’).
However, the average increase in bills experienced by these losing households is less than or equal to £20 a year. Under the backstop tariff, the extended WHD scenarios modelled, and the targeted free block of energy, winners experience an average decrease of over £100. In contrast, the removal of levies from an initial block (options 1 and 2) has a smaller impact on both bill increases and bill reductions – on average, the maximum bill increases are no more than £4, with bill reductions of approximately £8.
And for the large part, the ‘winners’ are the eligible households – at least 63% of eligible households are better off under each scenario and the percentages are substantially greater for many tariff options (see Figure E2).
Figure E2: Proportion of households better off as a result of tariff options, by eligible and non-eligible group
Wider impacts on health and wellbeing
A significant proportion of households targeted by these options are the poorest in our society, who are simultaneously on some of the most expensive energy tariffs on the market, as a result of having never switched energy supplier. Many of these households are also likely to under-heat their properties in winter, due to issues with affordability. Living in cold homes with unaffordable energy bills is well known to translate into adverse impacts on physical and mental health, and social wellbeing. Paying less for energy means that many individuals would be able to afford to heat their home to a higher temperature for the same cost, and would thus help to alleviate some of the physical and mental health consequences of living in a cold home.
The results clearly show that the backstop tariff and extended WHD options could be very effective at significantly reducing fuel bills for eligible households, and would only require small – and in some cases negligible – increases in the bills of other households to ensure ‘revenue neutrality’, or to cover the additional costs of a more broadly targeted fuel price discount.
Of these two options, the extended WHD option is likely to be easier to implement and represent a smaller administrative burden to energy companies. While this option also offers a guaranteed fixed reduction in energy bills, irrespective of energy consumption levels, one major negative aspect is that it does not transfer vulnerable households to cheaper tariffs (i.e. does not address the failure of the market to serve these customers).
A backstop tariff would transfer customers to cheaper tariffs and has the potential to reduce energy bills by a more significant amount than a fixed fuel price discount. However, it is likely to be more complex to implement in practice. It is also more difficult to determine exactly how energy companies and the energy market as a whole would respond.
Nevertheless, both these options could play a very important role in reducing the energy bills of those who are currently disadvantaged and poorly served by the energy market, and as a reult struggling to heat and power their homes, with positive consequences on the health and wellbeing for millions of households.
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